For-profit colleges and the threat of a new bubble

Tom Harkin

Haven't we heard this story before? It features a high-pressure sales force persuading consumers in search of the American dream to go deep into debt to purchase a product of often dubious value. Default rates are sky high. Taxpayer money is squandered. Top executives walk away with fortunes.

This sounds like a description of the subprime mortgage industry, which came crashing down two years ago. But what I just described is the reality at many for-profit colleges.

Their recruitment ads are ubiquitous, offering visions of a cap-and-gown graduation, followed by placement in a well-paying job. At their best, for-profit colleges deliver. Many provide top-quality, innovative options for students who want to pursue postsecondary education while managing work and family obligations.

But serious questions have been raised about some of the major players in this rapidly growing industry. Critics charge that many for-profit colleges employ overly aggressive recruiting tactics targeting low-income students. Students take on excessive debt, and though dropout rates are not available, there is reason to believe that they are very high.

Critics say that the entire business model, especially in the case of publicly traded companies, is premised on a college's ability to churn through many thousands of students, whose federal Pell grants of up to $5,550 and Stafford loans are paid to the school, with no accountability for student learning or graduation. Even good actors in this industry are lured into the vortex of bad practices in order to compete and meet investors' expectations.

For more than 50 years, the federal government has provided students with grants and loans to help pay for college. This has been a powerful investment in our human capital and our nation's future. However, an ongoing investigation by the Senate Committee on Health, Education, Labor and Pensions (HELP) has raised serious questions about whether students — and taxpayers — are getting good value for the surge of federal dollars flowing to for-profit colleges.

From 2008 to 2009, 23.6% of federal Pell grants flowed to for-profit schools, double the percentage from 1999 to 2000. Federal aid to for-profit colleges skyrocketed from less than $5 billion in 2000 to nearly $26.5 billion last year. At many of the major for-profits, federal dollars now account for more than 80% of their revenue, according to a Department of Education report.

The HELP Committee heard testimony in June from Yasmine Issa, a 29-year-old divorced mother of twins who used Pell grants and loans to pay for training to become an ultrasound technician. After completing the for-profit college program in 2008, she was turned down for jobs because — as she belatedly learned — the school's program was not accredited by the organization that determines if she is eligible for a required exam. She was left with a $21,000 debt.

Issa is not alone; 96% of associate-degree students at for-profit colleges take out loans, compared with only 38% of community college students. And for-profit college students are eight times more likely to graduate with a debt larger than $20,000.

For-profit colleges account for only 10% of students enrolled in higher education, but those students receive 23% of federal student loans and grants, and account for 44% of defaults.

Wall Street money manager Steven Eisman told the committee that many for-profit colleges are "marketing machines masquerading as universities." Their rapid growth is driven by easy access to federal student loans, guaranteed by the government. "The government, the students and the taxpayer bear all the risk," Eisman testified, "and the for-profit industry reaps all the rewards."

Some for-profit schools spend a very large share of revenues — nearly 50%— on non-instructional expenses, primarily marketing and recruiting. They do a poor job of producing graduates but a stellar job of generating wealth for shareholders and executives. One large for-profit institution has a nearly 40% profit margin, larger than most Fortune 500 companies, including Apple. The president of the largest for-profit college is paid nearly 14 times the compensation of the president of Harvard University.

Eisman, who was one of the first to predict the collapse of the subprime mortgage industry, sees disturbing similarities in today's for-profit college industry. He estimates that students enrolled by for-profit colleges could default on as much as $275 billion in federal student loans over the next decade.

Subprime borrowers were able to walk away from their homes and, therefore, their debt. But it is a different story for millions of students who take out loans to attend for-profit colleges. Under the law, people cannot discharge student debt in bankruptcy; so if they can't pay it off, it will continue to accrue compounded interest indefinitely. Subprime borrowers lost their homes, but students like Issa stand to lose their future.

In recent years, an absence of federal oversight has allowed a dangerous bubble to grow in the for-profit college industry. The challenge is to crack down on the bad actors and abusive practices while preserving the positive options and innovations that many for-profit colleges have pioneered.

Tom Harkin (D- Iowa) is chairman of the Senate Committee on Health, Education, Labor and Pensions.